Merger control
Electrabel/CNR: the importance of the
standstill obligation in merger proceedings
Bruno Alomar, Sophie Moonen, Gorka Navea and Philippe Redondo (1)
On 26 March 2008, Electrabel SA (“Electrabel”),
a Belgian electricity company which is part of the
French group, Suez (now GDF Suez), notified to
the Commission a concentration consisting in the
acquisition of de facto sole control over Compagnie
Nationale du Rhône (“CNR”), the second largest
electricity operator in France. 1
On 29 April 2008, the Commission cleared this concentration, as it did not raise any competition concerns. In this decision, the Commission left open
the exact date on which Electrabel had acquired
control over CNR, as that element had no impact
on the competitive assessment in the case.
One year later, in a decision of 10 June 2009 concluding proceedings initiated under Article 14 of the
Merger Regulation (2), the Commission found that
Electrabel had actually acquired de facto sole control
over CNR as from 23 December 2003 and it imposed a fine of EUR 20 million on Electrabel.
The Merger Regulation has created a system for
the preventive control of mergers. Under the EU
merger control system, a concentration with a Community dimension must be notified to the Commission before its implementation. (3) In addition, such
a concentration cannot be implemented both before and after notification until it has been declared
compatible with the common market (4). This latter
provision is also referred to as the ‘suspension obligation’ or ‘standstill obligation’.
The decision of 10 June 2009 finds that Electrabel
had breached the standstill obligation, which was
(1) The content of this article does not necessarily reflect the
official position of the European Commission. Responsibility for the information and views expressed lies entirely
with the authors.
(2) In 2003, the old Merger Regulation (Council Regulation
(EEC) No 4064/89) was still in force. It was repealed by
the current Merger Regulation (Council Regulation (EC)
No 139/2004) from 1 May 2004. The old Merger Regulation was in force at the time Electrabel acquired control
of Compagnie Nationale du Rhône on 23 December 2003.
Accordingly, the Commission’s infringement proceedings
were conducted under the old Merger Regulation.
(3) The obligation to notify a concentration with a Community
dimension prior to its implementation is provided by Article 4 (1) of both the old and the new Merger Regulations.
(4) The standstill obligation is contained in Article 7 (1) of
both the old and the new Merger Regulations.
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not time-barred at the time when the decision was
adopted. (5)
Ten years after the first infringement proceedings in
the Samsung/AST and A.P. Møller cases, the Commission’s decision of 10 June 2009 strongly re-affirms that the standstill obligation is a fundamental
rule and that the Commission will not tolerate its
breach.
The case is also an interesting – albeit fairly classical
– application of the prospective analysis which the
Commission undertakes in order to assess whether
an undertaking acquires de facto control over another undertaking.
The fundamental rule
of the standstill obligation
The standstill obligation is laid down in Article 7(1)
of the Merger Regulation (6) which provides that a
merger with a Community dimension may not be
implemented until it has been declared compatible
with the common market by a Commission decision
or, in the absence of a decision, by expiry of the
legal deadline.
The standstill obligation also applies to public bids,
since although the acquisition of shares is allowed,
the acquirer is required to notify the concentration
without delay and must not exercise the voting rights
attached to the acquired securities before the Commission’s decision approving the concentration. (7)
Derogations from this obligation are possible, but a
derogation can only be granted by the Commission
upon reasoned application of the party acquiring
control. (8) In practice, the Commission grants such
derogation only in exceptional circumstances, and it
(5) See Regulation (EEC) No 2988/74 of the Council of 26
November 1974 concerning limitation periods in proceedings and the enforcement of sanctions under the rules of
the European Economic Community relating to transport
and competition.
(6) Article 7 (1) of both Merger Regulations.
(7 ) Article 7 (2) of both Merger Regulations.
(8) Article 7 (3) of both Merger Regulations.
Number 3 — 2009
Competition Policy Newsletter
The standstill obligation, along with the obligation of prior notification which it complements, is
one of the cornerstones of the EU merger control
system, in that it enables the Commission to carry
out an ex ante control of all concentrations with a
Community dimension. Its existence also prevents a
concentration that is already implemented and that
gives rise to competition concerns from possibly
damaging competition. Furthermore, if the parties
to the concentration were allowed to implement a
potentially problematic transaction prior to a Commission decision approving the concentration, this
could make it more difficult to design effective remedies to the possible competition concerns at a later
stage. This is why, under the terms of the Merger
Regulation, the Commission can impose a significant fine (up to 10% of the turnover of the undertakings concerned) in the event of an infringement
of the standstill obligation. (10)
It is the first time that the Commission has imposed a
significant fine for a breach of the standstill obligation
since the EU merger control system entered into force
in 1990. Although the Commission imposed fines for
such an infringement twice in the past – in the Samsung/AST case in 1998 and in the A.P. Møller case in
1999 – these two precedents were the first such cases,
and the amount of the fines was comparatively much
lower (EUR 28,000 (11) and EUR 174,000 (12)).
In imposing a significant fine, the Commission sent
out a clear message to the effect that violating the
standstill obligation is, by its very nature, a serious
infringement which undermines the effectiveness of
Community provisions on the control of concentrations. (13)
Thus, in its decision the Commission emphasizes
that the principle that a concentration implemented
without authorisation does not give rise to competition concerns (as was the case for the concentration
(9) Article 7(3) of the Merger Regulation requires that, when
examining a request for derogation, the Commission takes
into account inter alia the threat to competition posed by
the concentration. Over the period 1990-2008, 101 derogations were granted and they concerned about 2.4% of
the notified concentrations. It can be noticed that the
trend of derogations granted has decreased from 2005:
over the period 2005-2008, the derogations concerned
1.2% of the notified concentrations on average, while the
average ratio was 3.2% for the period 1990-2004 (source:
statistics published on the website of DG Comp).
(10) Article 14 (2) (b) of both Merger Regulations.
(11) Case IV / M.920 - Samsung / AST, Commission decision
of 16 February 1998.
(12) Case IV / M.969 – A.P. Møller, Commission decision of
10 February 1999.
(13) See paragraph 188 of the Commission decision of
10 June 2009.
Number 3 — 2009
Electrabel/CNR) cannot detract from the seriousness of the infringement. The presence of damage
to competition would actually make the infringement even more serious. (14)
The seriousness of an infringement of the standstill obligation is, of course, only the starting point
when setting the fine. Indeed, in fixing the amount
of the fine the Commission will take into account
the possible additional factors of the gravity and
also the duration of the infringement. Likewise, the
Commission will also assess whether there are any
mitigating and aggravating circumstances.
Thus, in the Electrabel/CNR case, the Commission found other factors of gravity, namely that
Electrabel is a large company with substantial legal
resources, the acquisition of de facto control was
foreseeable under a well-established decision-making practice of the Commission and there already
existed precedents of fines for implementation before clearance. Also, the duration of the infringement was of at least three years and a half.
Finally, in this case, the Commission did not find
any aggravating circumstances and took into account the fact that Electrabel had disclosed the situation of sole control voluntarily and had answered
the Commission’s questions.
Prospective method for
detecting de facto control
As a consequence of the rule of the standstill obligation at the heart of a preventive merger control
system, the acquirer of control cannot decide to
detect its de facto control once the transaction has
been implemented. In other words, the acquirer has
a duty to assess the likelihood that it may acquire de
facto control through a proposed transaction before
the transaction takes place by using a prospective
method. In the case at issue, it is worth mentioning that the Commission’s approach regarding the
acquisition of de facto control has been fully in line
with its past practice, as set out in various Commission communications.
The background to the decision is that, on 23 December 2003, when Electrabel acquired from EDF a
number of shares in CNR, it increased its shareholding from 17.86% of the shares and 16.88% of the
voting rights to 49.95% of the shares and 47.92%
of the voting rights of the CNR respectively. The
second main shareholder was Caisse des Dépôts et
Consignations (CDC), a French public institution,
which held 29.43% of the shares and 29.80% of
the voting rights. The remaining shareholding was
(and still is) very dispersed, since about 20% of the
(14) See paragraphs 192 to 194 of the Commission decision of
10 June 2009.
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MERGER CONTROL
ensures that the derogation will not impair the effectiveness of the EU merger control system. (9)
Merger control
shares and the voting rights were shared between
around 200 public local entities.
In addition, CNR’s Board of Directors comprised
two representatives of Electrabel out of three, thereby giving Electrabel a majority on the Board. This was
facilitated by a shareholder agreement signed by CDC
and Electrabel in July 2003, which provided that, inter
alia, CDC and Electrabel would vote together when
appointing the representatives at the Supervisory
Board and at the Board of Directors of CNR.
At the time, Electrabel was also the sole industrial
shareholder of CNR and, as such, had taken over
the central role previously held by EDF in the operational management of CNR’s power plants and in the
marketing of the electricity produced by CNR. (15)
Electrabel did not acquire de jure sole control over
CNR since, inter alia, it did not acquire a majority
of the voting rights of CNR. Furthermore, such a
possibility was prohibited by a French law – and this
was still the case when Electrabel notified its acquisition of control over CNR in early 2008. (16)
A minority shareholder can nevertheless acquire sole
control on a de facto basis. Indeed, the Commission
considers that this is especially the case when the
acquirer is highly likely to achieve a majority at the
shareholders’ meetings, taking into account the attendance of shareholders at the shareholders’ meetings in previous years. (17) In accordance with the
Commission’s decision-making practice, the shareholders’ meetings have to be analysed over a period
of at least the past three years.
(15) Since 1948, CNR was bound by contract to EDF as regards
the management of CNR’s hydroelectric plants. Moreover,
EDF held one sixth of CNR’s capital and had a representative on its board of directors. In the context of the acquisition in 2001 of joint control over EnBW together with
OEW (Commission Decision of 7 February 2001 in case
COMP/M. 1853 – EDF/EnBW ) EDF undertook to ensure
that CNR would be enabled to be an entirely independent
electricity producer. To this end, EDF undertook, inter alia,
not to exercise its voting rights at general meetings except
through an independent proxy, to refrain from having a
representative on the board of directors, and to purchase,
until April 2006, upon request of CNR, part of its production as necessary to allow CNR gradual entry on the
market. EDF also undertook to provide technical services
to CNR for a transitory period, excluding functions related
to the optimisation and the production of CNR.
(16) Article 21 of Law No 2001-1168 of 11 December 2001 (the
“Murcef law”) provides that more than 50% of CNR’s
capital and voting rights must be owned by public entities.
Thus, a private operator cannot hold more than 50% of
CNR’s capital and voting rights.
(17 ) See paragraph 14 of the 1998 notice on the concept of concentration under Council Regulation (EEC) No 4064/89
on the control of concentrations between undertakings.
See also paragraph 59 of the Commission Consolidated
Jurisdictional Notice under Council Regulation (EC) No
139/2004 on the control of concentrations between undertakings, adopted on 10 July 2007.
60
In the course of the procedure, Electrabel claimed
that, on 23 December 2003, it could not have detected the existence of de facto exclusive control
over CNR. According to Electrabel, it was not until
June 2007, when it was in a position to examine the
situation prevailing at the shareholders’ meetings of
the CNR over the previous three years during which
it had achieved a constant majority of voting rights,
that it asked itself whether it had acquired de facto
control over CNR.
In its decision of 10 June 2009, the Commission rejected Electrabel’s method since “it would necessarily
mean that a company could exercise de facto control (without
notification or approval) over another company for three years
before notifying the Commission of the operation, on the basis
that it would not be absolutely sure that it was exercising
control until the three years were up.” (18)
Accordingly, if Electrabel had used a prospective
method from December 2003, it would have easily
detected that, on the basis of the attendance rates
at the shareholders’ meetings of CNR of the preceding years and the fact that the remaining shares
of CNR were widely dispersed, Electrabel - with
47.92% of the voting rights - was assured of a stable majority at the shareholders’ meeting of CNR as
from December 2003.
In addition, the Commission noted that, already from
December 2003, Electrabel had had the majority on
CNR’s Board of Directors, had been the sole industrial shareholder of CNR and, as such, had assumed
the central role previously held by EDF in CNR.
All these elements constituted a body of evidence
showing that Electrabel’s de facto control over CNR
had been easily foreseeable in December 2003.
Conclusion
By its decision of 10 June 2009, the Commission has
shown – like its counterparts in other jurisdictions
where such infringement proceedings are routinely
pursued by national competition authorities – its
commitment to enforce the obligations of prior notification and standstill obligations, which are at the
heart of the EU’s preventive merger control system.
The decision to sanction the infringement committed
by Electrabel is also entirely in line with the Commission’s strict policy when granting derogations
from the suspension obligation. At the same time,
the Commission’s decision is a relatively conventional
application of its long-standing practice as codified
in communications of 1998 and 2007 on the acquisition of de facto sole control, and should come as no
surprise to market participants. The significant fine
imposed on Electrabel was carefully weighed to take
into account all the circumstances of the case.
(18) See paragraph 56 of the Commission Decision.
Number 3 — 2009